Under its new “prudent and neutral” policy, the People’s Bank of China (PBOC) has adopted a modest tightening bias in a bid to cool torrid credit expansion, though it is treading cautiously to avoid hurting the economy.

The M2 growth target was endorsed by leaders at the closed-door Central Economic Work Conference in December, according to sources with knowledge of the meeting outcome.

“It’s not necessary to maintain last year’s high money supply growth,” said a source who advises the government.

“A money supply rise of 11 percent should be enough for supporting growth, but we probably need to have some extra space, considering risks in the process of deleveraging.”

China’s State Council Information Office, the government’s public relations arm, has yet to respond to a request for comment.

In 2016 the money supply target was around 13 percent, though it ultimately grew just 11.3 percent due to the effects of the central bank’s intervention to support the yuan currency CNY=CFXS, which effectively drained yuan liquidity from the economy.

Last year’s M2 target reflected Beijing’s focus on meeting its economic growth targets, but top leaders have pledged this year to shift the emphasis to addressing financial risks and asset bubbles.

Reuters has reported that China will lower its 2017 economic growth target to around 6.5 percent from last year’s 6.5-7 percent. The economy expanded 6.7 percent in 2016.

Last week, state media cited a party statement issued after a meeting of the Politburo that China must maintain stable economic development and social harmony ahead of the 19th Communist Party Congress in the autumn.

Key economic targets will be announced at the opening of the annual parliament meeting on March 5.

TIGHTENING BIAS

There have already been some substantive indicators of tighter monetary policy this year.

The central bank raised interest rates on its reverse repurchase agreements (repos) and the SLF on Feb. 3, following a rise in rates on the MLF in late January.

“The central bank could raise such policy rates further. But we cannot see any possibility of raising benchmark interest rates in the near term,” said one of the sources.

New yuan loans hit 2.03 trillion yuan in January, the second highest on record, due to a rush among lenders to maintain market share, while M2 rose an annual 11.3 percent in January.

The central bank said in a working paper published on Feb. 15 that the debt deleveraging process should be managed prudently to help avoid a liquidity crisis and asset bubbles.

China’s debt-to-GDP ratio rose to 277 percent at the end of 2016 from 254 percent the previous year, with an increasing share of new credit being used to pay debt servicing costs, UBS analysts said in a recent note.

“A decline in driving force from capital investment on economic growth is behind the rapid rise in leverage,” Ruan Jianhong, head of the Survey and Statistics Department at the central bank, said in remarks published on Friday.

In 2011, capital investment of 1 yuan could yield an increase of 0.32 yuan in GDP, but that has fallen to 0.16 yuan in 2015, Ruan told the official Financial News in an interview.

“We need to maintain appropriate economic growth. If growth slows sharply, various risks may be exposed,” said one of the sources.